Studies Show Market Timing is Less Important than Investors Think

Editor’s Note: For our weekend edition of The Bleeding Edge, we’re sharing another insight from our colleague Brad Thomas. Brad is a real estate developer and income specialist with more than three decades of experience.

Today, he shares a strategy to make sense of today’s market, inspired by the “Oracle of Omaha” himself. Read on…

By Brad Thomas, Editor, Intelligent Income Daily

It was October of 2008. And investors were panicking. 

The S&P 500 had fallen roughly 40% from its previous high set a year prior.

The financial system was in freefall, the economy was crashing, and many were terrified another Great Depression was upon us.

As I shared with you earlier this week, I remember that period well.

But around the same time, Warren Buffett – the man widely considered the world’s greatest investor – was doing something surprising.

On October 16th, The New York Times published an op-ed from Buffett. The title: “Buy American. I Am.”

Here’s what Buffett wrote at the time:

A simple rule dictates my buying: Be fearful when others are greedy and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.

To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. 

Buffett started buying stocks by the billions that month… the same month the Dow closed below 10,000 for the first time since 2004.

We might think that Buffett had spotted the bottom, that the rebound in equities was right around the corner.

Well, not exactly.

As the chart below shows, the S&P 500 wouldn’t bottom until March 2009, a peak-to-trough decline of 59%. That means Buffett sat through six more months of falling markets after he stated his intention to buy.

Buffett didn’t time the bottom. But here’s the point I’d like to make today: It didn’t matter in the slightest.

Market Timing Doesn’t Matter

At first glance, we might conclude that Warren Buffett’s market timing skills sucked in 2008. The same goes for a second glance.

But what you need to know is that he wasn’t trying to time the market. And because that wasn’t his goal, he didn’t fail.

He actually succeeded enormously. It’s just that he succeeded over time instead of right away.

You see, the S&P 500 went on to gain 481% from its bottom through today. The Nasdaq would climb more than 1,000%.

Individual companies like Amazon (AMZN) and UnitedHealth Group (UNH) did even better, rising 5,450% and 2,790%, respectively…

The lesson here is that even if you have terrible timing, the best stocks win out over the long term.

But instead of just finding great companies, investors tend to obsess over one- to two-year returns. Those really are short-term results. And according to studies from Bank of America and Fidelity, 94% of short-term results amount to luck.

Once you get further out, success becomes much more about fundamentals. Immensely so.

Here’s another way to look at it: In the short term, luck is 33x as powerful as fundamentals. But in the long term, fundamentals are 33x as powerful as luck.

And to build retirement income, we can’t rely on short-term luck.

What I’m saying is if we’re asking, “Has the market bottomed yet?” then we are asking the wrong question.

We should be asking ourselves, “What do the best stocks normally do after a big decline?”

That’s the right question. And I have an answer.

After Market Hell Comes Market Heaven

The market’s 21% decline over the first half of 2022 was its 11th worst six-month return since 1971. And I’m not saying it’s necessarily done falling. But as I shared above, we don’t need to know precisely when stocks will stop falling.

That’s because after falling 18%-plus in six months, do you know how often the stock market then went on to deliver positive returns over the next three years?

Every. Single. Time.

That’s why Buffett never asked, “Is this the bottom?” that fateful October. He just knew stocks were trading at fire sale prices and would eventually recover.

He focused on the longer-term picture. And then he went bargain shopping.

So now is the time to sharpen your knives. Don’t entrust your retirement to fear and luck. And don’t worry whether your stocks will drop tomorrow or next week.

In the end, it’s the stocks you choose that really matter. And if you keep Buffett’s model in mind, you’ll focus on the right questions and let the fundamentals carry you through.

But of course, that does beg the question: Which stocks should we be buying right now?

This is why I’m writing to you today…

On October 19 at 8 p.m. ET, I’ll be holding a special event to share my complete strategy for thriving in this market. And if you join me, I’ll even give you the name of my favorite, recession-proof play that could double from here, for free.

So,go here to sign up for my event on Wednesday, October 19, at 8 p.m. ET. I look forward to seeing you there.

Happy SWAN (sleep well at night) investing,

Brad Thomas
Editor, Intelligent Income Daily